Kieran Gallahue: CareFusion
$6.7 million total compensation
44 percent one year total shareholder return
N/A average annual five-year return: CareFusion went public in August 2009.
Much of CareFusion CEO Kieran Gallahue’s compensation came in stock. He had $4.6 million in performance-based and time-based shares vest during the medical device maker’s fiscal year.

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Kieran Gallahue: CareFusion
$6.7 million total compensation
44 percent one year total shareholder return
N/A average annual five-year return: CareFusion went public in August 2009.
Much of CareFusion CEO Kieran Gallahue’s compensation came in stock. He had $4.6 million in performance-based and time-based shares vest during the medical device maker’s fiscal year.

NS_SempraCEO253454x002.jpg_3_8_2006_San Diego, CA_DONALD E. FELSINGER, chairman and chief executive officer of the board of directors of Sempra Energy, sits in the board room of Sempra&apos;s corporate offices in San Diego. Sempra is a San Diego-based Fortune 500 company. We profile FELSINGER, who replaces Steve Baum at the company._NADIA BOROWSKI SCOTT/ San Diego Union-Tribune.

+Read Caption

NS_SempraCEO253454x002.jpg_3_8_2006_San Diego, CA_DONALD E. FELSINGER, chairman and chief executive officer of the board of directors of Sempra Energy, sits in the board room of Sempra's corporate offices in San Diego. Sempra is a San Diego-based Fortune 500 company. We profile FELSINGER, who replaces Steve Baum at the company._NADIA BOROWSKI SCOTT/ San Diego Union-Tribune.

Last year was not a good one for NuVasive’s stock. The San Diego maker of medical devices for spine surgery saw its share price cut in half as insurers balked at reimbursements for certain spinal procedures.

Last month, shareholders gave NuVasive the thumbs down — making it the only local company to flunk its “say on pay” vote so far this proxy season.

While NuVasive lost the “say on pay” vote, it wasn’t the only local firm to see its pay policies come under scrutiny.

Qualcomm, Sempra Energy, Life Technologies, Isis Pharmaceuticals and Kratos Defense also received negative say-on-pay recommendations from proxy advisory firms, which counsel pension funds and other large shareholders on corporate governance.

Shareholders passed pay proposals anyway after these companies put up a fight, sending letters to shareholders lashing back at the proxy firms’ judgments.

But the “no” recommendations highlight how executive pay remains contentious not only among shareholders but also in the public.

“A lot of the public outrage over executive compensation stems from the notion that there’s a lack of fairness or it’s just inappropriate for anybody to make $10 million a year,” said Wayne Guay, a professor at the University of Pennsylvania’s Wharton School. “We saw last year a lot of the 99-percent-versus-1-percent type of arguments that CEOs are making 100 times or 200 times what the typical employee makes at the firm.”

Moreover, there are examples every year of companies performing poorly and the executives still getting hefty paychecks, which sparks criticism over a lack of pay for performance.

But Guay says these arguments don’t dig deeply into what boards of directors are trying to accomplish with complex pay packages.

“In the general public, it’s more outrage over executive pay and this idea that there is no pay for performance, but that ignores the fact that these individuals hold a substantial amount of equity,” he said.

The compensation plan “has nothing to do with fairness,” Guay continued. “It’s all about making sure the management team has the right incentives to do what’s in the shareholders’ interest.”

Generally speaking, most companies try to structure executive pay plans in two ways. For hitting short-term performance targets, executives get bonuses in cash. For long-term performance, they’re paid in stock.

It’s these stock payouts that can lead to big paydays for CEOs if share prices rise. On the other hand, stock provided to executives will have less or perhaps no value if share prices fall.

More firms are working to get their side out, including filing additional proxy materials to justify executive pay plans. In most cases, the messages center on the marriage of executive pay to returns delivered to company shareholders.

“The big thing companies are focusing on now is trying to tell their story on pay for performance because companies do understand what the public perception is,” said Teri O’Brien, a San Diego-based partner with Paul Hastings, a law firm that works with corporate clients. “The story they’re trying to tell is: ‘Look, we only get paid if we bring value to our stockholders.’ ”

Votes are only advisory

This is the second year that shareholders have been able to cast votes on executive compensation, which was created as part of the Dodd-Frank financial reform act. Last year, 43 companies got “no” votes nationwide. So far this year, about 30 companies have seen shareholders reject pay plans, with about three weeks remaining in the proxy season.

Say on pay is only an advisory referendum — boards of directors aren’t mandated to change anything. But most do take it seriously, industry experts say.

“There’s no question it has gotten the attention of boards,” said Ken Wechsler, a San Diego-based compensation consultant with Radford Consulting. “Boards are trying to better link executive compensation and shareholder value. And companies are working at being more proactive with shareholders. I’m seeing more outreach, where investor relations is reaching out and talking more about compensation.”

NuVasive says no

NuVasive sent a letter to shareholders saying it strongly disagreed with Institutional Shareholders Services’ negative recommendation on say on pay. At a time when the U.S. spinal surgery market has seen virtually no growth, the company said it increased revenue by 13 percent and its market share by 10 percent. It made an acquisition that it believes will lead to more sales. It posted strong results in the first quarter of 2012.

But the company also lost money in 2011. Its stock price is down 52 percent over the past three years.

After getting a no vote, NuVasive talked to its 50 largest shareholders and made changes in its compensation policy for 2012. Among them was a provision that half of restricted stock awards to executives will be granted only if the company hits performance milestones. It also changed the peer group of companies to which it compares itself when determining executive pay so the peers more closely match NuVasive’s size, industry and location.

“We feel we have taken fundamentally very large steps to address the 2012 compensation,” said Patrick Williams, a NuVasive spokesman. “We’ve aligned the performance more with pay.”

Pay gap persists

Nationwide, chief executives at the nation’s largest companies were paid better last year than they were in 2010. The typical pay package for the head of a company in the Standard & Poor’s 500 was $9.6 million, according to an analysis by The Associated Press using data from Equilar, an executive compensation research firm. That’s up 6 percent from the prior year.

For San Diego’s roughly 100 publicly traded companies, CEO pay also bounced up last year. The average compensation for heads of local companies — including salary, bonus, perks, exercised stock options and vested restricted stock — rose 18 percent to $2.2 million.

Most of that increase comes from stock, not cash. The average cash salary and bonus for San Diego chief executives was essentially flat at $826,640.

Meanwhile, the average wage for payroll workers in San Diego County in the first quarter of 2012 was $51,051, up less than 1 percent from a year earlier, according to the latest figures available from the state Employment Development Department.

The gap between pay for the average worker and CEOs continues to be a cause celebre for labor unions and other critics of executive compensation. The AFL-CIO said CEOs at S&P 500 companies earned 380 times the pay of the average American worker last year. In 1980, the ratio was 42 times.

In those 31 years, however, the S&P 500 Stock Index increased about 950 percent, making stock holdings more valuable. Chief executives usually receive the bulk of their compensation in stock, not cash. Most company boards want executives to have a significant amount of their net worth tied up in company stock. When share prices go up, they benefit. And when share prices fall, they feel the pain along with investors.

Winners and losers

Qualcomm Chief Executive Paul Jacobs was the top-paid local executive last year with total compensation of $36.3 million. The company posted a $4.3 billion profit last year.

About $6.7 million of Jacobs’ pay was cash. The bulk of it, $28.9 million, came from stock options granted years earlier. Jacobs exercised the options, immediately sold the shares and pocketed the difference between the option price (about $29 to $34 per share) and Qualcomm’s share price last year (about $45 to $55.)

On the other hand, NuVasive’s recent share woes have resulted in CEO Lukianov having 1.75 million “underwater” stock options that are worthless unless the company’s share price rebounds. Lukianov has 262,200 options for shares that are “in the money” today, meaning the option strike price is lower than the company’s current share price, so they have some value.

“There are definitely circumstances where executives have a ‘win the lottery’ year, but there are a lot where they don’t,” said O’Brien, the Paul Hastings lawyer. “I have a ton of clients where the equity doesn’t perform as they hoped.”